Vertical R&D Alliance Strategies of the Midstream Enterprise in a Three-level Supply Chain

Advancing information technology is shortening product life cycle and the lead time to market for new products.To overcome limited RD budgets and resources,an enterprise often resorts to building an RD alliance with other enterprises.Cooperative RD alliances can help increase the speed of new product development and reduce investment risks.The industrial economics literature shows that RD alliances can be formed via vertical cooperation or horizontal cooperation.Empirical studies show that vertical RD alliances are more widely used and effective than horizontal RD alliances in helping enterprises improve their innovation capability.However,the theoretical research on horizontal RD alliances is very limited.There is a growing need for researchers to understand the potential effect of horizontal RD alliances on RD profits and innovation capability.This paper proposes a three-level industry chain system based on Banerjee and Ling's two-level vertical cooperation innovation model.The industry chain system consists of M upstream enterprises,1 midstream enterprise,and N downstream enterprises.The midstream enterprise plays a leading role in the industry chain by sourcing materials from upstream enterprises,processing the raw materials,and selling the works-in-progress to downstream enterprises.The downstream enterprises convert the works-in-progress into final products for end customers.Therefore,the midstream enterprise can play the central role of forming a vertical RD alliance with upstream and downstream enterprises.All enterprises in the industry chain can share both costs and profits,and improve their innovation capability.The midstream enterprise can adopt three strategies to help form the vertical RD alliance: non-RD,independent RD,and cooperative RD.Depending on the strategy adopted by the midstream enterprise,our model calculates the outputs and profits for each form of enterprise in the supply chain: upstream,midstream and downstream enterprises.The main conclusions from this paper are as follows.(1) The RD effect of the vertical RD alliance on the midstream enterprise is proportional to the number of downstream enterprises when the midstream enterprise adopts the independent RD strategy.(2) The independent RD strategy adopted by the midstream enterprise can create spillover effect on the profit of upstream and downstream enterprises.(3) The independent RD strategy adopted by the midstream enterprise can increase the profits for the entire three-level industry chain.(4) The RD effect of the vertical RD alliance on the midstream enterprise is proportional to the number of downstream enterprises and inversely proportional to the number of upstream enterprises when the midstream enterprise adopts the cooperative RD strategy.(5) The cooperative RD strategy is more effective than the independent RD strategy to create effective RD for the midstream enterprise.(6) The cooperative RD strategy can generate more profit than the independent RD strategy for the entire industry chain.